Buy one expensive house or purchase cheaper house and buy to let apartment

Jellybean73

Option A: If you have a mortgage offer from a bank for example €500,000 and you also have savings of €200,000, would you put all of the savings into purchasing a house of €700,000 (In Dublin)
OR
Option B: Would you buy a house for example €500,000 with a mortgage of €400,000 and then also buy an apartment for €200,000 in Dublin city (buy to let with at least €100,000 mortgage) and try and rent the apartment to cover the mortgage?

Q. In twenty years, what would you suggest is the better option in terms of a return for your investment? Option A or Option B

Figures are just an example.

MouseTail

Neither, I would buy the €500k house, either keeping the mortgage at €300, or if I could afford it, keeping the €200k liquid, perhaps in shares or bonds.

Jellybean73

MouseTail wrote: »

Neither, I would buy the €500k house, either keeping the mortgage at €300, or if I could afford it, keeping the €200k liquid, perhaps in shares or bonds.

Do you not think that keeping the €200k liquid would be riskier than buying property (over 20 years)?

Or would you suggest something like €150,000 in property and €50,000 in shares?

Eldarion

Balancing act then. You have to look at how much the LTV ratio increases and as a result how much higher the interest rate goes. Historically index funds are almost guaranteed to return ~8% P.A (not accounting for inflation) given a long enough time period. 20 years should ride out any boom and busts cycles as long as you're willing to ride out a couple more years should the bust happen around your 20th year.

robp

Eldarion wrote: »

Balancing act then. You have to look at how much the LTV ratio increases and as a result how much higher the interest rate goes. Historically index funds are almost guaranteed to return ~8% P.A (not accounting for inflation) given a long enough time period. 20 years should ride out any boom and busts cycles as long as you're willing to ride out a couple more years should the bust happen around your 20th year.

Generally I find myself as taking the side of stocks in the stock vs property debate but I think ~8% is super ambitious. I think in the US it is about 9.3% but unfortunately such returns are not quite that good in Ireland or Europe. Europe's main Euro index is currently at the level of 15 years ago (excluding dividends). I suspect 6% is more realistic.

athtrasna

Buy to let at current market prices seems a crazy risk to take if you don't need to. Taxes, PRTB registration, management fees and the risk that a tenant would do tens of thousands of euro worth of damage? Not to mention the risk of another crash and property devaluation.

hfallada

robp wrote: »

Generally I find myself as taking the side of stocks in the stock vs property debate but I think ~8% is super ambitious. I think in the US it is about 9.3% but unfortunately such returns are not quite that good in Ireland or Europe. Europe's main Euro index is currently at the level of 15 years ago (excluding dividends). I suspect 6% is more realistic.

6% is fair for European shares. But if you reinvest dividends, your investment grows significantly. eg 150k at 6%eg (BP, Tesco) with dividends reinvested is 1.152 million. This is not including dividend growth which can add on a few hundred thousands.

Atlantic Dawn

If you have a mortgage offer for €500k from the bank and savings of €200k, the best investment gain you are likely to make with that €200k would be to just take €300k from the bank and use it with the €200k for the €500k house. Mortages are one of the most expensive ways to borrow money.

mortimer33

Jellybean73 wrote: »

Option A: If you have a mortgage offer from a bank for example €500,000 and you also have savings of €200,000, would you put all of the savings into purchasing a house of €700,000 (In Dublin)
OR
Option B: Would you buy a house for example €500,000 with a mortgage of €400,000 and then also buy an apartment for €200,000 in Dublin city (buy to let with at least €100,000 mortgage) and try and rent the apartment to cover the mortgage?

Q. In twenty years, what would you suggest is the better option in terms of a return for your investment? Option A or Option B

Figures are just an example.

Do you have a family?
My choice would be to buy a house for e250-e300K using most of the 200K savings. Retain some for redecoration. The money that would have gone into that 500K mortgage repayments could be drip fed on a monthly basis into your pension, mortgage overpayment and a portfolio of savings a/c., bonds, stocks. You could then also just enjoy the freedom that comes with having little or no mortgage..

Eldarion

Atlantic Dawn wrote: »

Mortages are one of the most expensive ways to borrow money.

....What? :eek:

Mortgages are one the cheapest ways to borrow money.

Jellybean73

mortimer33 wrote: »

Do you have a family?
My choice would be to buy a house for e250-e300K using most of the 200K savings. Retain some for redecoration. The money that would have gone into that 500K mortgage repayments could be drip fed on a monthly basis into your pension, mortgage overpayment and a portfolio of savings a/c., bonds, stocks. You could then also just enjoy the freedom that comes with having little or no mortgage..

If we factor in that it is a family with two kids.
The sensible option is probably to buy a cheaper house as you suggest and put most of the savings in to reduce the mortgage, but I don't think that buying a house for 250-300k in Dublin is feasible.

It's difficult to buy a house in dublin for that price range.

Is it better to have the freedom now with a little or no mortgage or to achieve freedom and bigger gains/returns in 20 years time?

mortimer33

Jellybean73 wrote: »

Is it better to have the freedom now with a little or no mortgage or to achieve freedom and bigger gains/returns in 20 years time?

I'd be worried that I'd be putting all my eggs into one basket - property? I would definitely opt for freedom now.. You don't know where you'll be in 20 years time! Imagine all you could do if you had no mortgage/rental payments tomorrow!

You should be able find a decent family home in Dublin for 250k-300K. Doesn't have to be SCD.

This question, slightly differently,

Say I had a good chunk of equity built up in my house, and a bit of savings. I was thinking of selling the house, thereby saving myself a lot every month in mortgage payments. Then I could buy somewhere in Dublin for cash, as an investment, rent it out and use the rent as income for my rent or mortgage payments somewhere I'd like to live.

I wouldn't have enough cash to buy a house where I would like to live myself, I could afford an investment though.

Its all about me having more money every month, so what do you think? Sensible?

ted1

With investment properties your in it for the long haul. You won't get rich from rent, so your banking on capital appreciation or on other people paying your mortgage for 20 to 30 years and changing your deposit if 50k into 300k ( Totally made up figures)

Green investments will yield 10% over 5 years and akdo benefit from tax incentives. So realky if you have cash you should look at investments.
E.g if I had GBP or dollar I'd buy euros or Russian roubles now and sell in 12-17 months

MarkAnthony

Why, oh why, oh why would you want to have the hassle of being a landlord.

Speak to a good Financial Advisor.

Well, its not like I would want to be a landlord, I would just like to have an income every month.
That's why I thought buying somewhere for cash, then renting it out would suit me.

Does anyone think it's a good idea?

hfallada

bubblypop wrote: »

Well, its not like I would want to be a landlord, I would just like to have an income every month.
That's why I thought buying somewhere for cash, then renting it out would suit me.

Does anyone think it's a good idea?

No. Its like shares in BP, where every few months you get a dividend cheque. With properties you have to spend money maintaining it. You have to pay a huge amount of taxes on the rent. You aren't going to have a whole let left after you pay all your expenses.

Jellybean73

bubblypop wrote: »

Well, its not like I would want to be a landlord, I would just like to have an income every month.
That's why I thought buying somewhere for cash, then renting it out would suit me.

Does anyone think it's a good idea?

That is kind of my point.

I'm beginning to think that stocks and shares may be the best option. However, many of my friends bought apartments in the city at the top of the boom. Rather than selling, they are moving out, renting them to someone else which is covering the mortgage and either renting a house or buying a cheaper house. I wonder whether that is a good idea?

Jellybean73

mortimer33 wrote: »

I'd be worried that I'd be putting all my eggs into one basket - property? I would definitely opt for freedom now.. You don't know where you'll be in 20 years time! Imagine all you could do if you had no mortgage/rental payments tomorrow!

You should be able find a decent family home in Dublin for 250k-300K. Doesn't have to be SCD.

I suppose it depends on your age.....I think I would prefer to have a secure future. We are always being told to make sure you have a sizeable pension. I always want to be able to help my kids in the future, particularly the way their future has been made difficult due to the Irish banking crisis. I would be looking for a SCD property because that is where I want to be and where my family is.

I do agree that maybe buying a second property might not be the best option and that stocks/bonds etc might be a better deal, but like property, there is also major risk involved.

Maybe a bit of both would be a good idea, just one house and then stocks/bonds.

MarkAnthony

bubblypop wrote: »

Well, its not like I would want to be a landlord, I would just like to have an income every month.
That's why I thought buying somewhere for cash, then renting it out would suit me.

Does anyone think it's a good idea?

What has your FA advised? Is there a suitable, more stable and reliable alternative?

MarkAnthony

MarkAnthony wrote: »

What has your FA advised? Is there a suitable, more stable and reliable alternative?

Where would I find a financial advisor?
Are they biased at all? Like do they work for themselves? Get commission from other companies?
Forgive my ignorance

MarkAnthony

Jellybean73 wrote: »

I do agree that maybe buying a second property might not be the best option and that stocks/bonds etc might be a better deal, but like property, there is also major risk involved.

Maybe a bit of both would be a good idea, just one house and then stocks/bonds.

But there is predictability of risk. Being a landlord anything can happen.

I'd ask yourself these questions:

-Are you prepared to deal with rehoming a tenant, lost rent and hassle of the apartment being gutted by fire?

-Are you prepared to deal with the PRTB, courts and tenant during the excruciatingly slow process of evicting career rent avoiders that is going to take around a year or more?

-Are you then prepared to go in and clean up human feces, months of rubbish and the emotional hit of seeing everything you put in the apartment destroyed because of pure vandalism.

-Are you prepared to take calls at 2am because the fan is making a lot of noise in the bathroom or next door are having a party?

-Sit through arbitration with the PRTB facing the possibility of huge fines because your tenant turned out to be an antisocial asshat.

These are just some of the stupidity you'll have to deal with. Not to mention the day to day stuff even a good tenant brings.

Finally your financial situation doesn't seem ideal. You must be paying the effective 53% rate (with USC and PRSI). Which means a €100,000 loan is going to cost you c. €600 per month at the current incredibly low interest rates. You are going to need to generate in excess of c.€1300 per month to break even, I'd guess around €1700 a month to make it pay a couple of hundred quid a month, assuming a 100% occupancy rate and great tenants all the time.

Rents are unusually high, interest rates are unusually low, Ireland is unusually anti-landlord. OP (and others) you'd be insane IMHO but it's your money.

EDIT: At those values you may even end up hitting the 'high earners' bracket and be prevented from claiming back legitimate expenses to keep your effective tax rate high. I spent most of my revenue law semester staring at the lecturers killer bod, so take proper FA and accountancy advice.

MarkAnthony

bubblypop wrote: »

Where would I find a financial advisor?
Are they biased at all? Like do they work for themselves? Get commission from other companies?
Forgive my ignorance

Approach your bank first of all, maybe ask in investments and pensions (if their charter allows).

Make sure you go through the figures with an accountant also, they will be quite impartial and show you what you're getting into. I was charged €100+VAT for an initial consultation as a guide and I think that was quite high as the guy I wanted was in demand.

Jellybean73

MarkAnthony wrote: »

But there is predictability of risk. Being a landlord anything can happen.

I'd ask yourself these questions:

-Are you prepared to deal with rehoming a tenant, lost rent and hassle of the apartment being gutted by fire?

-Are you prepared to deal with the PRTB, courts and tenant during the excruciatingly slow process of evicting career rent avoiders that is going to take around a year or more?

-Are you then prepared to go in and clean up human feces, months of rubbish and the emotional hit of seeing everything you put in the apartment destroyed because of pure vandalism.

-Are you prepared to take calls at 2am because the fan is making a lot of noise in the bathroom or next door are having a party?

-Sit through arbitration with the PRTB facing the possibility of huge fines because your tenant turned out to be an antisocial asshat.

These are just some of the stupidity you'll have to deal with. Not to mention the day to day stuff even a good tenant brings.

Finally your financial situation doesn't seem ideal. You must be paying the effective 53% rate (with USC and PRSI). Which means a €100,000 loan is going to cost you c. €600 per month at the current incredibly low interest rates. You are going to need to generate in excess of c.€1300 per month to break even, I'd guess around €1700 a month to make it pay a couple of hundred quid a month, assuming a 100% occupancy rate and great tenants all the time.

Rents are unusually high, interest rates are unusually low, Ireland is unusually anti-landlord. OP (and others) you'd be insane IMHO but it's your money.

EDIT: At those values you may even end up hitting the 'high earners' bracket and be prevented from claiming back legitimate expenses to keep your effective tax rate high. I spent most of my revenue law semester staring at the lecturers killer bod, so take proper FA and accountancy advice.

Ouch! We're you burned? That's a very negative viewpoint of the landlord/tenant world. Did you have a bad experience? It's not all doom and gloom.

What about more professional tenants or families? What about management companies that could do it for you? What about references, etc? There will always be antisocial people, but surely a good background check would weed out certain types?

The figures I quoted were fictional, not fact. It was just to get a discussion going on possibilities re investment. I do have experience of renting. I also have friends and family who are landlords/ladies who are doing okay re their tenants. I have seen one situation in which a friend had a nightmare problem in evicting a tenant who was in months of arrears and was antisocial and trashed the place. So I can see the problems. However I do believe that you can mostly identify a good versus bad potential tenant.

Stocks and shares....... I see your point....to get to the bottom line...is less hassle!

astrofool

As long as you're putting money into a pension, on reasonable salary in a relatively secure job, and expect to be there for 15-20 years, I'd be looking at spending the money on the house which gives you the best lifestyle, whether that be close to work, or transport, close to good schools etc. You need to decide what's important to you, excess cash which you can spend on holidays/stuff, or a comfortable home, or combination thereof. I know people who would live in a closet if it means they can go on lots of holidays, while others want the white picket fences in the nice suburb.

sbsquarepants

MarkAnthony wrote: »

.

Finally your financial situation doesn't seem ideal. .

200K savings. Earning enough to be approved for 500k mortgage (presumably complete with another 100k deposit)

Financial situation sounds just fine to me!

Jellybean73

astrofool wrote: »

As long as you're putting money into a pension, on reasonable salary in a relatively secure job, and expect to be there for 15-20 years, I'd be looking at spending the money on the house which gives you the best lifestyle, whether that be close to work, or transport, close to good schools etc. You need to decide what's important to you, excess cash which you can spend on holidays/stuff, or a comfortable home, or combination thereof. I know people who would live in a closet if it means they can go on lots of holidays, while others want the white picket fences in the nice suburb.

You make a lot of sense astrofool, you should be called astrosense!

Pension is ok, salary is ok and job relatively secure. It would be great to buy a house and have a lifestyle rather than scrimping to pay the mortgage and eat beans on toast for 20 years because you've picked the suburban house with white picket fence.

Lux23

I would buy the expensive and keep my savings. Not for any clever financial reasons, just that I wouldn't like the hassle of a buy to let property.

MarkAnthony

Jellybean73 wrote: »

Ouch! We're you burned? That's a very negative viewpoint of the landlord/tenant world. Did you have a bad experience? It's not all doom and gloom.

What about more professional tenants or families? What about management companies that could do it for you? What about references, etc? There will always be antisocial people, but surely a good background check would weed out certain types?

The figures I quoted were fictional, not fact. It was just to get a discussion going on possibilities re investment. I do have experience of renting. I also have friends and family who are landlords/ladies who are doing okay re their tenants. I have seen one situation in which a friend had a nightmare problem in evicting a tenant who was in months of arrears and was antisocial and trashed the place. So I can see the problems. However I do believe that you can mostly identify a good versus bad potential tenant.

Stocks and shares..... I see your point....to get to the bottom line...is less hassle!

I'm recently in a position where I've been forced into becoming a landlord. I was one for many years remotely before I disposed of property in Scotland. Touch wood, other than doing the stupid thing of letting out an apartment to a 'friend' I've never had any issues. But then I was avoiding tax and dealing with an excellent rental firm I was paying 14% too.

You have to look at your motivations. Do you want to become a landlord as you think you'd enjoy it? If so great! A friend of mine did this in Edinburgh and makes a nice side line from it. With half a dozen properties he still has to work full time but he enjoys running his side business and fair play to him.

If it's profit your after though I suspect there are ways that are less hassle and more rewarding.

sbsquarepants wrote: »

200K savings. Earning enough to be approved for 500k mortgage (presumably complete with another 100k deposit)

Financial situation sounds just fine to me!

The key is making money from an investment, not losing it. People have some very odd ideas on how profitable being a landlord is.

By all means consider all the positives (I'm having trouble locating them other than running a little side business, probably at a loss or may be breaking even) but one would be a fool not to consider the massive downsides and a fool and his money are soon parted.

Jellybean73

Lux23 wrote: »

I would buy the expensive and keep my savings. Not for any clever financial reasons, just that I wouldn't like the hassle of a buy to let property.

You can't have both though! It's either put it all in the expensive house or buy a cheaper house and keep some of your savings and invest them in property or stocks and shares.

MarkAnthony

MarkAnthony wrote: »

The key is making money from an investment, not losing it. People have some very odd ideas on how profitable being a landlord is.

By all means consider all the positives (I'm having trouble locating them other than running a little side business, probably at a loss or may be breaking even) but one would be a fool not to consider the massive downsides and a fool and his money are soon parted.

But, if you bought a place for cash, then the monthly income would be just that, right? Minus whatever taxes etc you have to pay. Then its still monthly income.
I wouldn't have a mortgage to pay.

I just can't think of anything else that I could put 200,000 euro into and get an income from every month?

MarkAnthony

bubblypop wrote: »

But, if you bought a place for cash, then the monthly income would be just that, right? Minus whatever taxes etc you have to pay. Then its still monthly income.
I wouldn't have a mortgage to pay.

I just can't think of anything else that I could put 200,000 euro into and get an income from every month?

It's actually detrimental in someways not to have a mortgage as you're not getting tax relief on it. That aside, the effective tax rate is likely to be 53% unless you're income is quite low. So lets say you get a great deal and a €200,000 apartment is generating a 9% yield.

200,000 @ 9% = 18000 income
You might have €3000 worth of deducible expenses.
Giving you a taxable gross profit of €15,000 that's a tax liability of €7950.

Cashflow:

€18000, less €3000, = €15000, less €7950 = 7050 or 587.50 per month. Worth the hassle? You decide.

The above is making the assumption of a 100% occupancy rate and that the tenant always pays. It's less risky for you as if you have no income/a loss you can carry that forward but are you willing to walk into your investment after a year of having no money coming in to find a five figure sum in damage?

I'm focusing on the negatives as many seem to be focusing solely on the positives.

€7050 return per year on €200,000 is 3.5% roughly? (Although that's net but optimistic). I'm not a FA but I'd be surprised if a higher return wasn't possible.

Please feel free to correct the calculations - as I say most of my time in tax law was spent day dreaming.